Should diversity matter to investors?

Diversity and inclusion is becoming a common focus for investors.

Why?

Research continues to show that a diverse and inclusive workforce not only offers improved decision-making, it also affects a company’s bottom-line.1

In fact, companies in the top 25 per cent for gender diversity on their executive teams are 21 per cent more likely to outperform companies in the bottom 25 per cent in terms of profitability. Those in the top-quartile for ethnic and cultural diversity are also 33 per cent more likely to have industry-leading profitability compared to the bottom quartile.1

In this article, we’ll examine the opportunities for investing in companies that support diversity and why organisations like BT are advocating for it as part of their sustainable investing approach.

The opportunities for diversity

While diversity and inclusion has been predominately recognised as an important part of corporate social responsibility, there’s now evidence to show that it’s actually an integral part in driving profitability.

And it makes perfect sense.

A collective team of people from culturally diverse backgrounds might actually alter the behaviour of a group’s social majority in ways that lead to improved and more accurate group thinking.1 It also helps to remove potential bias that can otherwise blind the team from making the best decisions.

Companies that support gender diversity: potential profitability

Gender diversity in particular, has gained significant attention in Australia as a result of initiatives like the 30% Club which aims to achieve 30 per cent women on ASX200 boards. From December 2018, female representation on ASX200 boards reached 29.7 per cent, up from 19.4 per cent when the initiative was first launched in 2015.2

Importance of gender diversity in leadership

But it’s not just about having more gender diversity – it’s about where these employees are positioned within the company.

Gender diversity in management positions has been found to impact profitability more than previously thought. Data collected between December 2016 and November 20171 indicates that companies in the top 25 per cent for gender diversity on their executive teams were 21 per cent (originally thought to be 15 per cent) more likely to experience higher financial performance than the bottom quartile.

It gets better.

Large organisations with at least one female board member also demonstrate higher return on equity and higher net income growth than those that do not have any women on the board.3

So, the drive to have more women in positions where strategic decisions are being made, is no longer a nice-to-have, it’s a must-have.

Companies that support ethnic and cultural diversity: potential profitability

Further evidence of a significant correlation between diversity and performance can be seen at the board of directors’ level where more ethically and culturally diverse companies are 33 per cent more likely to see higher profitability than the bottom quartile.1

Companies that don’t support diversity: the impact

Companies at the other end of the spectrum, with low diversity in management and executive roles, may be penalised by their lack of gender, ethnic and cultural representation.

In fact, companies in the bottom 25 per cent for both gender and ethnic/cultural diversity were 29 per cent less likely to achieve above-average profitability.1

What does this all mean?

Organisations like BT, have for some time, been advocating to have a robust approach to diversity and inclusion. When BT invests on behalf of its customers (including super members), workforce diversity is one of the key issues that it considers as part of its sustainable investment approach.

Part of this approach is an ongoing dialogue with directors and senior management of invested companies to encourage positive change in areas like diversity.

So, the case for diversity is no longer just about social progression - it can in fact deliver long-term sustainable performance.

How to invest in companies that support diversity

If you are considering investing in companies that support diversity and inclusion, there are a number of ways to do this.

If you are selecting your own investments in companies directly, there are a number of tools that can help you understand a company’s approach to ESG, which includes diversity. For example you can access sustainability scores for all of the companies in the ASX200 through BT products.

The scoring has been developed in partnership with research houses Morningstar and Sustainalytics and aims to give customers and financial advisers the tools to consider the sustainable approach of companies when making decisions about their investments.

It’s important to point out that sustainability scores are not an evaluation of an investment’s financial performance, and do not provide an assessment of overall investment merit. Rather, they should be used in conjunction with other measures for a more complete approach to investment portfolio construction.

In summary

Considering how a company embraces inclusion and diversity may help make better investment decisions, especially given this research shows a correlation between diversity and performance.

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Investors are shifting from only looking at short-term returns to a broader focus on long-term value creation, including the impact a company is having on those around them. We explore sustainable investing in more detail.

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This article was prepared by BT. BT is a part of Westpac Banking Corporation ABN 33 007 457 141, AFSL and Australian Credit Licence 233714. This information is current as at 22 May 2019. This article provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

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